Generally Accepted Accounting Principles (GAAP) is a set of accounting rules created to govern financial reporting for corporations in the United States.
GAAP was established mainly as a response to the Stock Market Crash of 1929 and the next Great Depression, which was believed to be at least partially caused by less-than-honest financial reporting practices by some publicly traded companies.
A method of reporting on financial transactions and creating financial statements is known as GAAP. Basically, it is based on rules and practices that have developed over time.
The Financial Accounting Standards Board established these accounting regulations (FASB). GAAP ensures transparency and consistency of reporting for public organizations.
The Governmental Accounting Standards Board (GASB) and the Financial Accounting Standards Board (FASB) are under the direction of the Financial Accounting Foundation (FAF). The FAF is responsible for appointing board members and ensuring that these boards operate fairly and transparently. So that members of the public can attend FAF organization meetings in person or through live webcasts.
The Financial Accounting Standards Board (FASB) is responsible for the Accounting Standards Codification (ASC), a centralized resource where accountants can find all current GAAP.
The FASB Standards-Setting Process
- Identify current investor issues
- Draft issue agenda and hold public meetings
- Publish exposure draft for investor commentary
- Propose new standards and invite business feedback
- Weigh all public responses and revise accordingly
- Announce final revisions to the ASC
The GASB was established in 1984 as a policy board charged with creating GAAP for state and local government organizations. So many groups rely on government financial statements, including constituents and lawmakers. GASB prioritizes fairness and transparency. The board’s processes and communications are available for public review.
The GASB Standards-Setting Process
- Create an independent task force
- Conduct research on the subject of the new standard
- Engage the public through published commentary
- Create an exposure draft of the planned standard
- Host a public hearing before the standard is finalized
International Business Machines Corporation (IBM) provides a summary of their U.S. GAAP to Operating (Non-GAAP) Results Reconciliation (Unaudited) which shows GAAP earnings, non-GAAP adjustments, and the non-GAAP totals. The non-GAAP numbers include pro forma figures, which do not include one-time transactions.
Pro forma figures are often use by companies to predict future performance. While non-GAAP reports may show more accurate figures for companies that experienced unusual one-time transactions, other businesses often list repeated earnings as one-time figures.
Even though they appear transparent, non-GAAP figures can create confusion for investors and regulators. International Business Machines Corporation (IBM) provides a summary of their U.S. GAAP to Operating (Non-GAAP) Results Reconciliation (Unaudited) which shows GAAP earnings, non-GAAP adjustments, and the non-GAAP totals.
The non-GAAP numbers include pro forma figures, which do not include one-time transactions. Pro forma figures are often use by companies to predict future performance. While non-GAAP reports may show more accurate figures for companies that experienced unusual one-time transactions, other businesses often list repeated earnings as onetime figures.
Even though they appear transparent, non-GAAP figures can create confusion for investors and regulators.
IFRS are a set of accounting standards that originated in the early 1970s and are currently use in over 166 jurisdictions. While the U.S. does not fully comply with IFRS, global companies face challenges when creating financial statements.
Even though the FASB and IASB created the Norwalk Agreement in 2002, which promised to merge their unique set of accounting standards, they have made minimal progress. In an effort to move towards unification, the FASB aids in the development of IFRS.
IFRS standards cover a wide range of financial reporting topics, while U.S. GAAP focuses on specific rules and guidelines. GAAP is important for its uniformity, comparability, and transparency, which helps ensure honest and accurate financial reports.
10 GAAP Principles
Principle of Regularity
GAAP-compliant accountants strictly follow established rules and regulations. So this means that financial statements must be created in keeping with all applicable laws and rules, including tax laws and legal obligations.
Principle of Consistency
Consistent standards are apply throughout the financial reporting process. This makes ensuring that financial data is present consistently. So basically, it makes simpler for stakeholders to compare data across time and between other organizations.
Principle of Sincerity
GAAP-compliant accountants are committe to accuracy and impartiality. So this means that financial statements must reflect the true financial position of an organization, without any misleading information or bias.
Principle of Permanence of Methods
Consistent procedures are use in the preparation of all financial reports. So this ensures that the same accounting methods and principles are use for all financial information, making it easier to compare information across different periods.
Principle of Non-Compensation
All aspects of an organization’s performance, whether positive or negative, are fully report with no prospect of debt compensation. So this means that financial statements must accurately reflect all relevant financial information, even if it includes negative performance or financial losses.
Principle of Prudence
Speculation does not influence the reporting of financial data. So this means that financial statements must be prepare base on actual financial transactions and events, without any speculation or guesswork.
Principle of Continuity
Asset valuations assume that the organization’s operations will continue. So this means that financial statements must be prepare to assume that the company will continue to operate in the near future.
Principle of Periodicity
Reporting of revenues is divide by standard accounting periods. Such as fiscal quarters or fiscal years. So this means that financial data must be disclose at regular periods, allowing stakeholders to track an organization’s financial success over time.
Principle of Materiality
Financial reports fully disclose the organization’s monetary situation. This means that financial statements must include all relevant financial information, regardless of the dollar amount.
Principle of Utmost Good Faith
All involved parties are assume to be acting honestly. So this means that financial statements must be create with the idea. So that all parties involved are acting in good faith, with no purpose to scam or misleading.
Differences Between GAAP and Non-GAAP Accounting
|Definition||Generally Accepted Accounting Principles (GAAP) are a set of accounting rules and standards used by companies to prepare financial statements. These rules ensure that financial reporting is consistent and accurate.||Non-GAAP accounting refers to any accounting method that does not follow GAAP guidelines. This could include using alternative methods for revenue recognition, expense classification, or financial reporting.|
|Required by law||GAAP accounting is required by law for public companies in the United States.||Non-GAAP accounting is not required by law, but companies may choose to use it as a way to provide additional information to investors.|
|Reporting standards||GAAP accounting standards are set by the Financial Accounting Standards Board (FASB) and the Securities and Exchange Commission (SEC).||There are no set reporting standards for non-GAAP accounting, which can make it difficult to compare financial statements between companies.|
|Emphasis on accuracy||GAAP accounting is designed to ensure that financial reporting is accurate and consistent.||Non-GAAP accounting may prioritize other factors, such as highlighting a company’s growth potential or emphasizing positive financial metrics.|
|Use of metrics||GAAP accounting typically focuses on traditional financial metrics, such as revenue, expenses, and profits.||Non-GAAP accounting may use alternative metrics, such as adjusted earnings or non-recurring expenses, to provide additional context around a company’s financial performance.|
|Disclosure requirements||GAAP accounting requires companies to disclose certain information in their financial statements, such as significant accounting policies and potential risks.||Non-GAAP accounting may provide additional disclosure around specific metrics or performance indicators.|
|Scrutiny by regulators||GAAP accounting is subject to scrutiny by regulatory bodies such as the SEC and FASB.||Non-GAAP accounting may not receive the same level of regulatory scrutiny, which can lead to concerns about accuracy and consistency.|
|Use in financial reporting||GAAP accounting is used for financial reporting in public companies and other organizations.||Non-GAAP accounting may be used in financial reporting for private companies, but it is not required.|
|Uniformity||GAAP accounting provides a uniform basis for financial reporting across all companies that use it.||Non-GAAP accounting can vary widely between companies, which can make it difficult to compare financial statements.|
|Transparency||GAAP accounting is designed to provide transparency around a company’s financial performance.||Non-GAAP accounting may be used to present a more positive or favorable view of a company’s financial performance.|